Advocates Say Housing Policy Discourages Mixed-Use Development

But federal officials say they'll likely need more data before they can make any change.

Ask members of Generation Y where they want to live, and chances are you’ll hear a common answer: urban environments where there is plenty to do within walking distance. For younger people (and many other Americans, for that matter), the cul-de-sac is no longer key.

Yet national housing policy isn’t reflecting those changing preferences, say some advocates. These advocates are pushing the federal government to do away with practices they say discourage the type of walkable, sustainable communities – think condos and apartments on top of coffee houses, clustered around transit stops – that a growing number of Americans desire.

As it stands, the Federal Housing Administration, Fannie Mae, Freddie Mac and several Housing and Urban Development programs each limit the non-residential portion of projects they insure to anywhere from 15 percent to 30 percent of its value. Since private lenders take their cues from the federal requirements, those policies may be preventing the planning of walkable neighborhoods and mixed-use developments championed by those in the New Urbanism school of planning.

“If you build condos you’re trying to sell on top of a coffee shop, the residential [portion] is not going to be 80 percent,” says John Norquist, a former Milwaukee mayor and president and CEO of the Congress for the New Urbanism. “That’s Main Street America or Brooklyn.”

The caps were initially put in place in the 1930s, when Fannie Mae was created, during a time when the country was embracing single-use zoning, which requires retailers to be clustered in on area and housing to be in another.

But in some urban areas, consumers are signaling that’s no longer what they want. Norquist’s organization, along with the National Association of Realtors and the National Association of Home Builders recently met with federal officials from the Treasury Department and HUD to discuss the issue and make their case that the feds should raise or eliminate those caps.

William Tuyn, a board member with the National Association of Home Builders, noted the irony that the caps seem to conflict with other sustainability programs the federal government promotes. “That’s a problem,” Tuyn says. The rules can be changed administratively, without legislative action, and both Norquist and Tuyn believe the feds are open to change.

But federal officials will likely want to see more data before making such a significant shift in their policies. After all, the mission of agencies like HUD is housing, and that's where their expertise lies. The commercial real estate market is a whole different animal from the housing market, with it's own set of risks. “Philosophically we're in the same place,” says Raphael Bostic, HUD’s assistant secretary for policy development and research. "We want to get the same types of buildings built. But we have to do it within the constraints of our business model.”

If any change does happen, it will likely first start off as a pilot program – though that may be increasingly difficult during this era of budget cuts. And HUD will likely need to see numbers proving that a shift in policy would pay off, without creating unnecessary risks. “I’m hopeful that there are folks out there that can start to build the body of evidence for us,” Bostic says.

Other agencies seemed less open to a change. A spokeswoman for Freddie Mac declined to comment on the issue, citing its position in federal conservatorship. A spokesman for Fannie Mae simply said that the percentages are guidelines, not hard caps, and individual developments can be reviewed for possible exceptions.

Norquist believes local governments have a big stake in the eventual outcome. In addition to helping to create desirable places to live, he says, an increase or elimination of the caps could also help mitigate the risk of some developers by helping them diversify a project. After all, it’s the sprawling rows of foreclosed single-family homes in and around places like Las Vegas, Phoenix and Tampa that have come symbolize the recession (though it's worth noting commercial real estate has had its own struggles).

Meanwhile, Tuyn says that the private-sector is taking on the issue because it will profit by giving consumers the type of housing they want. “The private sector recognizes that people are diverse,” he says. “Their needs are diverse. The last thing any builder wants is any type of policy that mandates one type of development pattern over another.”